Advanced Search
MyIDEAS: Login to save this article or follow this journal

Herd behaviour experimental testing in laboratory artificial stock market settings. Behavioural foundations of stylised facts of financial returns

Contents:

Author Info

  • Manahov, Viktor
  • Hudson, Robert

Abstract

Many scholars express concerns that herding behaviour causes excess volatility, destabilises financial markets, and increases the likelihood of systemic risk. We use a special form of the Strongly Typed Genetic Programming (STGP) technique to evolve a stock market divided into two groups—a small subset of artificial agents called ‘Best Agents’ and a main cohort of agents named ‘All Agents’. The ‘Best Agents’ perform best in term of the trailing return of a wealth moving average. We then investigate whether herding behaviour can arise when agents trade Dow Jones, General Electric, and IBM financial instruments in four different artificial stock markets. This paper uses real historical quotes of the three financial instruments to analyse the behavioural foundations of stylised facts such as leptokurtosis, non-IIDness, and volatility clustering. We found evidence of more herding in a group of stocks than in individual stocks, but the magnitude of herding does not contribute to the mispricing of assets in the long run. Our findings suggest that the price formation process caused by the collective behaviour of the entire market exhibit less herding and is more efficient than the segmented market populated by a small subset of agents. Hence, greater genetic diversity leads to greater consistency with fundamental values and market efficiency.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/pii/S0378437113004524
Download Restriction: Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

Volume (Year): 392 (2013)
Issue (Month): 19 ()
Pages: 4351-4372

as in new window
Handle: RePEc:eee:phsmap:v:392:y:2013:i:19:p:4351-4372

Contact details of provider:
Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

Related research

Keywords: Agent-based modelling; Artificial stock market; Genetic programming; Herd behaviour stylised facts; Efficient market hypothesis;

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  2. Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May.
  3. Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, vol. 88(4), pages 724-48, September.
  4. Arthur, W.B. & LeBaron, B. & Palmer, R., 1997. "Time Series Properties of an Artificial Stock Market," Working papers 9725, Wisconsin Madison - Social Systems.
  5. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  6. Sushil Bikhchandani & Sunil Sharma, 2001. "Herd Behavior in Financial Markets," IMF Staff Papers, Palgrave Macmillan, vol. 47(3), pages 1.
  7. Forsythe, Robert & Forrest Nelson & George R. Neumann & Jack Wright, 1992. "Anatomy of an Experimental Political Stock Market," American Economic Review, American Economic Association, vol. 82(5), pages 1142-61, December.
  8. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
  9. Russ Wermers, 1999. "Mutual Fund Herding and the Impact on Stock Prices," Journal of Finance, American Finance Association, vol. 54(2), pages 581-622, 04.
  10. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August.
  11. Caram, L.F. & Caiafa, C.F. & Proto, A.N. & Ausloos, M., 2010. "Dynamic peer-to-peer competition," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(13), pages 2628-2636.
  12. Cont, Rama & Bouchaud, Jean-Philipe, 2000. "Herd Behavior And Aggregate Fluctuations In Financial Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 4(02), pages 170-196, June.
  13. Welch, Ivo, 1992. " Sequential Sales, Learning, and Cascades," Journal of Finance, American Finance Association, vol. 47(2), pages 695-732, June.
  14. Yeh, Chia-Hsuan & Yang, Chun-Yi, 2010. "Examining the effectiveness of price limits in an artificial stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 2089-2108, October.
  15. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
  16. Devenow, Andrea & Welch, Ivo, 1996. "Rational herding in financial economics," European Economic Review, Elsevier, vol. 40(3-5), pages 603-615, April.
  17. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
  18. Scharfstein, David. & Stein, Jeremy C., 1988. "Herd behavior and investment," Working papers WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  19. Stephen F. Le Roy, 2004. "Rational Exuberance," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 783-804, September.
  20. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W., 1992. "The impact of institutional trading on stock prices," Journal of Financial Economics, Elsevier, vol. 32(1), pages 23-43, August.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Manahov, Viktor & Hudson, Robert & Gebka, Bartosz, 2014. "Does high frequency trading affect technical analysis and market efficiency? And if so, how?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 131-157.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:phsmap:v:392:y:2013:i:19:p:4351-4372. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.